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Alternate entropy measure for assessing volatility in financial markets.

Bose, Ranjan and Hamacher, Kay (2012):
Alternate entropy measure for assessing volatility in financial markets.
In: Physical review. E, Statistical, nonlinear, and soft matter physics, pp. 056112, 86, (5 Pt 2), ISSN 1550-2376, [Article]

Abstract

We propose two alternate information theoretical approaches to assess non-Gaussian fluctuations in the return dynamics of financial markets. Specifically, we use superinformation, which is a measure of the disorder of the entropy of time series. We argue on theoretical grounds on its usefulness and show that it can be applied effectively for analyzing returns. A study of stock market data for over five years has been carried out using this approach. We show how superinformation helps to identify and classify important signals in the time series. The financial crisis of 2008 comes out very clearly in the superinformation plots. In addition, we introduce the super mutual information. Distinct super mutual information signatures are observed that might be used to mitigate idiosyncratic risk. The universality of our approach has been tested by carrying out the analysis for the 100 stocks listed in S&P100 index. The average superinformation values for the S&P100 stocks correlates very well with the VIX.

Item Type: Article
Erschienen: 2012
Creators: Bose, Ranjan and Hamacher, Kay
Title: Alternate entropy measure for assessing volatility in financial markets.
Language: English
Abstract:

We propose two alternate information theoretical approaches to assess non-Gaussian fluctuations in the return dynamics of financial markets. Specifically, we use superinformation, which is a measure of the disorder of the entropy of time series. We argue on theoretical grounds on its usefulness and show that it can be applied effectively for analyzing returns. A study of stock market data for over five years has been carried out using this approach. We show how superinformation helps to identify and classify important signals in the time series. The financial crisis of 2008 comes out very clearly in the superinformation plots. In addition, we introduce the super mutual information. Distinct super mutual information signatures are observed that might be used to mitigate idiosyncratic risk. The universality of our approach has been tested by carrying out the analysis for the 100 stocks listed in S&P100 index. The average superinformation values for the S&P100 stocks correlates very well with the VIX.

Journal or Publication Title: Physical review. E, Statistical, nonlinear, and soft matter physics
Volume: 86
Number: 5 Pt 2
Divisions: 10 Department of Biology
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10 Department of Biology > Computational Biology and Simulation
Date Deposited: 09 Jan 2013 10:39
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